Caracas - From new
homes in slums to cash for struggling mothers, Venezuela's Hugo Chavez is
unleashing a flood of state spending to try to tip the balance in what looks
like the toughest presidential election of his political career.
The spending campaign may help win over wavering supporters and overwhelm the good looks and yes-we-can optimism of opposition candidate Henrique Capriles.
Yet Chavez's cash-driven push ahead of the vote in October
will come with a heavy post-election hangover for the Opec nation's economy.
Inflation could hit 35%, the debt burden looks set to rise,
and a third currency devaluation in as many years is looking inevitable. All of
that would force Venezuela to slam on the monetary and fiscal brakes in 2013.
The government budget shows this year's outlays jumping 46%
from 2011, while social spending by state oil company PDVSA and a series of
loosely regulated government funds are pumping additional liquidity into the
system.
Venezuela's economy under the socialist Chavez has
repeatedly defied doomsday predictions. With the price for the its mainstay
exports of oil near $100 per barrel, investors remain happy to snap up its
high-yielding bonds even as Chavez pushes ahead with nationalisations and puts
more of the economy under state control.
Despite frequent diatribes about the evils of capitalism,
Chavez has never threatened to default on Venezuela's debt.
That, combined with a steady flow of petrodollars, has given
investors confidence its notes are safe and allowed Venezuela in 2011 to become
Latin America's biggest issuer of global bonds.
But the spending boom risks increasing the country's
dependence on oil revenue, increasing vulnerability to a price slump and
strangling domestic industries already struggling with entrenched inflation and
threats of nationalisation.
"In the short term Venezuela is unlikely to have a
credit event, but there's definitely growing concern about the medium and long
term due to the pressure created by these latest bonds with such high
coupons," said Felipe Hernandez of RBS Securities.
Home, sweet home
In the housing complexes where the government is handing out
apartments to Venezuelans who have lived in poverty for generations amid a sea
of oil wealth, the idea that the country cannot afford its current spending is
seen as absurd.
"Sure there's money. Oil is making lots of cash,"
said Ruth Felisola, 44, a housewife who just moved into a new home in the
state-built Santa Eduvigis complex of 158 apartments after her wood-and-zinc
shack in a nearby slum collapsed.
"Every Venezuelan has a right to their drop of oil, and
I've got mine right here."
Her three-bedroom hillside apartment, where she sells sodas,
chips and groceries, overlooks a valley filled with yellow cranes lifting
pylons onto half-built concrete structures that in the coming months will
become homes for needy families.
It is part of the government's plan to build 200 000 homes
this year at a cost of about $14bn. Most will go to slum dwellers whose homes
were damaged by floods in 2010.
Oil-funded social spending has worked for Chavez before. His
creation of literacy, health and subsidised food programmes was crucial to a
decisive referendum win in 2004, as well as to a more than 20 percentage point
re-election victory in 2006.
Using windfall oil revenue to finance quickly-launched
social campaigns has, though, proved less effective in stopping Venezuela's
horrific rise in violent crime, or an electricity crisis that led to chronic
blackouts in 2010.
Those problems opened space for opposition challengers like
Capriles to portray Chavez as an incompetent manager more focused on
ideological crusades than day-to-day problems.
Chavez's treatment for an unidentified cancer last year left
him largely out of the public eye for weeks, and polls began showing Capriles
nearly neck-in-neck with the president - something that had been unthinkable
since 1999.
But the former soldier has already recovered lost ground as
he staged what appeared to be a quick recovery. Latest polls show him enjoying
a wide lead for the October vote, though this may shrink as Capriles' campaign
gets started.
Big spend, big headache
Chavez's support among the poor depends not only on
state-backed social programmes but also on growth. The economy expanded 4% in
2011 and is seen growing at a similar pace this year, thanks to higher oil
prices and the heavy spending programmes.
Maintaining that rhythm will be difficult in 2013 as
inflation eats away at living standards and limited investment prevents
industry from boosting productivity.
Venezuela's monetary liquidity, a measure of the money
supply that is a key inflation indicator, rose nearly 50% in 2011 and will
likely jump another 57% in 2012, said economist Asdrubal Oliveros of
Caracas-based Ecoanalitica.
Chavez devalued the bolivar currency twice in 2010 as cheap
imports left domestic industries losing market share, once from 2.15 per dollar
to a two-tiered exchange rate of 2.6 and 4.3, and again later in the year by
moving all exchanges to 4.3.
This boosted the price of imported goods and helped push
inflation - a constant complaint of his poor supporters - to the highest on the
continent in 2011 at 27.6%.
With ever more pressure on the bolivar, economists are
universally predicting a devaluation, but delayed until after the vote because
it is politically unpopular.
Investment in buildings, machinery and vehicles crucial for
productivity increases to sustain economic growth - an indicator known as gross
fixed capital formation - slumped more than 6% in 2009 and in 2010, the central
bank said.
The private sector's investment in those areas fell nearly
30% in 2010, with state outlays picking up only some of the slack - a sign that
domestic industries will become less productive and growth more dependent on
government.
PDVSA, which has increasingly taken on the financing of
social programmes, issued $10.3bn worth of dollar-denominated bonds last year.
Its issuance in 2011 alone comprised nearly half the $22.9bn
in outstanding bonds as of the end of 2011, a figure that does not include debt
to its suppliers and service firms.
Venezuela and PDVSA together issued a total of $17.5bn in
dollar bonds last year, and analysts are predicting sales of another $12bn to
$15bn in 2012.
The flood of supply has investors demanding higher yields
from Venezuelan and PDVSA bonds, which at the start of the year were in some
cases yielding as much as 14%.
Venezuelan sovereign bonds maturing in 2016 had yields
around 10.7% in early February, compared to a 2.5% yield for Colombian bonds
maturing in 2017.
Government sympathisers enjoy laughing at the prophets of
doom over Venezuela's economy, in part because their forecasts have largely
proven wrong for nearly a decade.
Legislator and economist Jesus Faria of the ruling Socialist
Party (PSUV) noted that inflation during the Chavez era has been considerably
lower than during the previous decade, when it reached a peak above 100%.
Fiscal expansion has benefited the country's poorest, he
argued, denying any link to the upcoming vote.
"Our economic policies have nothing to do with the
election, they respond to a programme we call socialism," he said.
"If we are increasing public spending, it's because we have to address
social problems that have built up over centuries."
Socialism not all bad for Wall Street
Though Venezuela did suffer more from the 2008 financial
crisis than nearly any other country in the region, its two-year recession was
far milder than predicted by opposition pundits.
And investors note that Chavez has explicitly avoided any
discussion of a debt default.
This makes the high bond yields a bargain for those who can
stomach the "headline risk", or short-term volatility that follows
Chavez's state takeovers and threats against industry.
John Carlson, senior portfolio manager at Fidelity
Investments in Boston, said Venezuelan paper represented 14 to 15% of the $6bn
he manages in about a half-dozen funds, concentrated mostly in the New Markets
Fund.
"Over the next three to five years, we think there is
clearly the ability to service all of that (debt) and there is a willingness to
service it - and it looks cheap," Carlson said.
Most Wall Street analysts recommend Venezuela's debt despite
their criticisms about economic and fiscal policy and concerns about the
upcoming surge in pre-electoral spending.
Opposition leaders lambaste the arbitrary use of state funds
to heighten what they call Chavez's populist cult of personality and prevent
challengers from facing the former soldier in a fair fight. Chavez rebuffs such
attacks with practised indignation.
"No, it's not populism, that's a term invented by the
neoliberals to try to justify the policies of hunger and misery against the
peoples of the Earth," Chavez told Congress in an annual address that went
on for more than nine hours.
He is also not the only one offering state largesse to win
over voters. Opposition governors, mayors and councilmen, who are up for
elections in December, also shower constituents with community centres, schools,
and offers of financing.
On a recent campaign stop by the Caribbean coast, Capriles,
governor of second-largest state of Miranda, promised fishermen credits and new
motors should he win power.
Still, such offers are dwarfed by Chavez's wave of social
programmes created in recent months. Two offer direct cash payments to mothers
and senior citizens, and another promises to train and find jobs for the
unemployed.
"I give thanks to President Chavez for having started
such a great programme. This is going to let Venezuelans advance and have
opportunities to work and learn new skills," said Delkys Llamosa, 27, a
housewife waiting in line with her daughter to sign up for job training in
downtown Caracas.
"Everything I have is because of him. I'm going to get
my house from him, my children are getting benefits, and now I'm going to get a
job. If he's not here, all this falls apart."